Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
Two reports arising from Citi research are making the case that it's not OPEC, not U.S. shale producers, but bond markets and investment bankers that will determine the supply and price of crude oil.
The most salient fact in this regard is that many U.S. shale producers spend more than they earn and are thus dependent on a constant stream of new financing to keep operating. For FT Alphaville's Izabella Kaminska, this means:
"It's the capital markets [that determines oil supply], which for the most part are made up of a melange of passive, active, risk averse and risk-on investors. As a collective they either provide financing to help withhold commodities from the market so as to keep sector investment flowing or alternatively which withdraw financing so as to release stored or pent-up commodities to the market to cover shortages."
In other words, as long as investors keep buying corporate debt issues and new share offerings from oil producers, the oil glut will continue.
Bloomberg expands on the Citi research report that underpins Ms. Kaminska's post:
" 'The shale sector is now being financially stress-tested by low prices, exposing shale's dirty secret: many shale producers outspend cash flow and thus depend on capital market injections to fund ongoing activity,' Citi analysts led by Richard Morse wrote in research published on Tuesday."
"Shale's dirty little capital market secret" – FT Alphaville
"Citi: Capital Markets Now Control Oil Prices" – Bloomberg
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The Bank of Canada releases its update on monetary policy today and while this would normally create excitement, the overwhelming consensus is for a big, fat nothingburger according to University of Western Ontario economics professor Mike Moffatt:
"Luke Kawa tells us that the market odds of a rate cut are 14.2 per cent. I'd say it's even less likely than that. There are enough reasons for optimism that it makes sense for the Bank to play 'wait and see' until the next rate announcement on Oct. 22nd."
"Interest Rate Announcement" – Moffatt, Facebook
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Citi chief economist Willem Buiter warned that the odds of a global economic recession are climbing because of a rapidly weakening emerging markets economy:
"Among reasons for worry is his view that in reality China is already growing closer to 4 per cent than the government's goal of about 7 per cent targeted for this year. A shallow recession would likely occur if expansion slowed to 2.5 per cent in the middle of next year and stayed there, he said.
Other emerging markets such as Brazil, South Africa and Russia are already in trouble while developed economies are still lackluster. Commodity prices, trade and inflation remain sluggish and corporate earnings are slowing."
"Citigroup Sees 55% Risk of a Global Recession Made in China" – Bloomberg
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Reports indicate that Bombardier has rejected overtures regarding the sale of its rail business. But, in light of the Rona takeover debacle, did anyone really thing the Quebec government would have allowed the transaction anyway?
"In the letter addressed by BII Chairman Tian Zhenqing to Bombardier's Executive Chairman Pierre Beaudoin and not yet disclosed to the market, BII put the unit's enterprise value – calculated as equity plus debt – at $7- to $8-billion.
But Bombardier's Vice President for Mergers and Acquisitions Louis Veronneau, who was copied in the non-binding offer, rejected the proposal in a letter to Tian one week later.
'We are not exploring a transaction involving a majority stake at this juncture,' Veronneau wrote back on Aug. 21."
"Bombardier rejects Chinese offer for railway unit: documents" – Report on Business
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China continues to grow crude imports but the underlying details are not so bullish for investors in global oil stocks:
"[China's] crude imports are up 9.8 per cent in the first eight months of the year compared to the same period in 2014, at 220.67 million tonnes, or about 6.63 million bpd... [but] It's no secret that China has been filling strategic and commercial stockpiles, and furthermore the nation's refiners have been ramping up exports of refined products."
"China's crude imports are robust, details are not: Russell" – Reuters
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Tweet of the Day: "@dbcurren BMO thinks #China's dwindling imports are "perhaps more distributing" than downward revisions to GDP data #trade https://twitter.com/dbcurren/status/641345428739362816/photo/1" – Twitter
Diversion: "Stephen Colbert's Late Show debut: the good, the bad, and the weird" – Vox